Apple Earnings Call – New Product Categories Are Coming

by Brad Moon | October 29, 2013 3:21 pm

Apple Earnings Call – New Product Categories Are Coming

When Apple (AAPL[1]) reported its Q4 earnings on Monday, it did better than anticipated. Revenue, iPhone sales and EPS were all higher than analysts were looking for and if iPad sales came in a bit lighter than expected that can likely be chalked up to consumers holding off buying in anticipation of the newly announced iPad Air and Mini with Retina Display[2]. AAPL bounced around as investors absorbed factors influencing the flat margins Apple is projecting for the December quarter and the troubling trend of earnings that decreased compared to the same quarter last year for the third straight time.

What didn’t get the same attention as record iPhone sales or flat margins were clearer signals than ever that Apple is prepping to release new product categories. This is exactly the kind of move that can boost margins and result in dramatic sales in a way that the maturing smartphone, tablet and declining PC markets can’t.

If you want to listen to the full audio of Apple’s Q4 conference call, you can do so here[3], or you can read the highlights on Forbes[4].

Leaving aside gangbuster iPhones sales, CEO Tim Cook’s prediction that it’s going to be an “iPad Christmas” and Mac sales that declined 6% (but outperformed the overall PC industry[5] — which was down 10% – for a remarkable 29th straight quarter), I want to focus on several of Cook’s statements that provide a very strong indication Apple is up to something besides incremental product upgrades.

15 Strategic Acquisitions in Fiscal 2013

When Apple buys another company, it’s usually to either improve an existing product or to rapidly introduce new technology for which it lacks in-house expertise. Sometimes it’s both, a perfect example being the 2012 purchase of biometric security firm Authentec[6]. Just over a year later, that $356 million investment resulted in the Touch ID fingerprint sensor — giving Apple a lead in mobile security while providing a key selling point for the new iPhone 5S.

Acquisitions in 2013 have included a number of location data companies such as Hopstop[7] that will help to strengthen its own Maps app. It also bought indoor location firm WiFiSlam and a low-energy chipmaker called Passif Semiconductor — both of which could be part of pushing Apple’s iBeacons[8], a stealth feature in iOS7 that has potential to threaten NFC in both retail micro-location and wireless payment. Then there’s Cue, an app that offers functionality similar to Google (GOOG[9]) Now. Obviously, Cue functionality will find its way into Apple’s Siri, but Cult of Mac for one, thinks Cue could be the key[10] to notifications on Apple’s long-rumored iWatch smartwatch.

Perhaps most interesting all is what we don’t know. As pointed out by TechCrunch[11], Tim Cook made a point of saying Apple completed 15 acquisitions, but there appears to be no information out there about seven of those. What are they and why did Apple buy them? Why isn’t it talking publicly about them?

“We can use our skills in building other great products that are in categories that represent areas where we do not participate today. So we’re pretty confident about that.”

That’s directly from Tim Cook. It’s difficult to misinterpret the statement which leaves little doubt about moving to new product categories. If you were cynical, you might point out that the bigger-screened iPhone Apple is reportedly considering for next year could be a phablet — a category where Apple most definitely does not participate today — but I don’t think Cook is trying to tangle anyone up with wordplay.

Put the pieces together: Cook’s statements, the acquisitions and former Apple Technology SVP Bob Mansfiel’s move[12] from the executive team to heading up special projects. It all adds up to something new. Not just new, but different enough that Apple had to bring in outside expertise and put one of its most valuable assets — the guy who oversaw the teams that built pioneering products like the iMac, MacBook and iPad — in charge.

What are the new product categories? A smartwatch seems like a no-brainer. Wearable tech is becoming huge, competitors from Microsoft (MSFT[13]) to Google are reportedly prepping their own versions for release and Samsung (SSNLF[14]) already has its offering on store shelves. Rumors have been swirling for years[15] about an Apple-branded television. TVs are hardly a money printing venture these days, but perhaps a premium 4K set with iTunes integration, Siri voice command and an iOS remote would command the kind of gadget lust and margins that have been fading in the iPhone and iPad lines. I still think a set-top box (the current Apple TV on steroids and with wireless controllers) has the potential to completely disrupt[16] the video game console market, raining on the Xbox One and Sony’s (SNE[17]) PS4.

Given the apparent effort, investment, mystery acquisitions and the high profile oversight going into the projects, I suspect Apple is betting the next new breakout product is currently in its pipeline.

The Next Big Thing

The question is when. Apple is notoriously perfectionist and will not release a “beta” product. Cook took a moment to set expectations on timing: “I didn’t say in April that you would see them in this year and the first half of next year. So just to be clear on that. But what I have said is that you would see some exciting new products from us in the fall of this year and across 2014.”

If next year comes anywhere close to being a repeat of 2007 and 2010 — when Apple released the iPhone and iPad, setting the stage for spectacular growth — then Apple investors have a lot to look forward to.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.